CW REO's

NEW -> Contingent Buyer Assistance Program
Janet,





From <a set="yes" linkindex="7" href="http://www.irvinehousingblog.com/2007/04/23/its-not-the-borrowers-its-the-loans/" rel="bookmark" title="Permanent Link to It?s not the Borrowers; It?s the Loans.">It’s not the Borrowers; It’s the Loans.</a>

<p>First, I would suggest you review <a linkindex="14" href="http://www.irvinehousingblog.com/2007/03/01/financially-conservative-home-financing/" rel="bookmark" title="Permanent Link to Financially Conservative Home Financing">Financially Conservative Home Financing</a>. In that post I stated, “At the time of reset, if you are unable to make the new payment (your salary does not increase), or if you are unable refinance the loan (home declines in value), you will lose your home. It’s that simple.” It is my contention based on the information in the above chart, we can deduce the Alt-A and Prime borrowers will face one or both of the conditions which will cause them to lose their homes.</p>

<p>Look at the gray bars which make up the majority of the reset amounts due over the next 24 months (2007 and 2008). These are the Sub-Prime borrowers. They are already defaulting in large numbers, and we have all witnessed the tightening of credit (or elimination of credit) being offered to these borrowers. We also know many of these borrowers were put into the dreaded 2/28 loans and they cannot afford the reset. And, as if that isn’t enough, most of these borrowers were given 100% financing (if they could save up for a downpayment, they probably wouldn’t be Sub-Prime.) Therefore, it is probably safe to assume many if not most of these borrowers will default. Why wouldn’t they? Most haven’t put any money into the transaction, they have no equity as prices are declining, and they already have bad credit. What is the worst that could happen? They will just go back to renting, big deal. Think about what that means… a large number of defaults and foreclosures will occur over the next 3 years (the time span will be spread out due to differences in borrower holding power and the time spent in the foreclosure process).</p>

<p><a set="yes" linkindex="15" href="http://www.irvinehousingblog.com/wp-content/uploads/2007/04/average-life-cycle-of-a-foreclosure.jpg" title="Life Cycle of a Foreclosure"><img width="500" src="http://www.irvinehousingblog.com/wp-content/uploads/2007/04/average-life-cycle-of-a-foreclosure.jpg" alt="Life Cycle of a Foreclosure" /></a></p>

<p>In addition to the tightening credit and worsening buyer psychology, if large numbers of sub-prime borrowers are defaulting over the next 3 years, prices will certainly fall. <strong>Therefore, it is also safe to assume that when the Alt-A and Prime borrowers who have taken out adjustable rate mortgages need to refinance starting in earnest 3 years from now (see the red and light gray bars in the Adjustable Rate Mortgage Reset Schedule), they may be underwater and unable to refinance.</strong></p>

<p>Why do I think so many will be underwater? For one, prices will be significantly lower in 2010. In the forums, we have already documented price reductions by the builders of about 15%, and we also know it isn’t helping sales. More builder price reductions are on the way. It isn’t difficult to imagine prices being 30% or more below the peak by 2010. How many Alt-A and Prime borrowers with adjustable rate mortgages do you think have more than 30% equity in their properties?</p>
 
Janet,





I think you are thinking yourself into a frenzy. I tried to put it to you very simply. I DO NOTE MODIFICATIONS FOR BORROWERS. The reason why we do it is for the exact same reason I originally stated. The note modification that you are talking about, Janet, is only done with spotless loans. You must have perfect credit history. The banks motivation is to make additional monies from the newly repackaged loan sale, and yes they are also lowering your default risk as well.





The bank simply communicates with the investor to see if any loans are available at the particular moment and at what price. If the bank knows that they cannot sell the new note on the open market for profit, then they will not repurchase it. The servicing bank retains the right to <em>amend and restate the original note. </em>The borrower only needs to sign a new rate rider, disclosure, and TIL.


<em>


</em>I just met with a couple this morning that qualified for one. The current loan was a monthly adjustable option arm with a fully-amortized rate of 7.45%. I was able to modify their note to a 7 year fixed rate option arm @ 6.75%. Their minimum payment was slightly higher and the new interest only payment was much lower, which means they are now deferring less interest per month.





It is not necessarily the rate that matters to the MBS bondholders, but the PAYMENTS. Negative amortization is considered revenue (I think this is risky accounting) but the cash flow stream of payments matters more to the investors. They have to pay the bondholders out of the borrowers payments.





To answer Graphix's question, I believe he/she was assuming that a bad loan was repurchased. This is completely different from these note modifications I am talking about; however, we could still repurchase them. We could repurchase them at a price below what we sold it for, modify it so it is beneficial to the borrower, retain it in our own portfolio for 12 months until there is a clean 12 month payment history, and then try to resell it. Remember, credit is <u>NEVER</u> re-pulled with a note modification. The investor only has the original credit report, original appraisal and the CURRENT payment history.
 
The reason why investors were buying these loans like crazy was because:





1.) At least for the first 24 months or so, the borrower had minimal chance of missing a payment. The minimum payment options are typically below what a rent payment would be.





2.) These loans typically are underwritten with a 3 year prepayment penalty. Usually 6 months advanced interest based on 80% of the balance currently owed @ the current rate.
 
<em>"The minimum payment options are typically below what a rent payment would be."</em>





Which also explains why so many borrowers were taking these out.
 
<p>That is what makes me so upset about this whole bail out or reworking the loan idea.</p>

<p>The people that took these loans paid less to live in a home (they couldn't afford) then many people paid in rent. They also got to write off the interest on their mortgage. Which is the entire payment if they were interest only.</p>

<p>I keep seeing the hardluck cases of people who didn't know. Then I turn to cable and see, flip this house, flip this house dallas, flip that house, flipping out. flipper the dolphin. Where a person buys low and sells high. Well sometimes you buy low and have to sell lower or buy high and have to sell lower.</p>

<p>I wish the media would call a spade a spade. People got greedy. They couldn't afford a home and bought it. Hoping to get a 10-20% increase in housing costs. Think about that return on investement. </p>

<p>I invest nothing on a 700k house (I can't afford) then make payments less then I would pay in rent. So I am saving money. Tax credits, great. I n two years my loan resets and I sell for $840k.</p>

<p>Wow. Making 140k in two years with really no capital investment. Show me one other investment where I can put down nothing, pay less and get a tax write off. Now that the music stopped all these savey investors are crying because it worked for the person they bought it from.</p>

<p>I almost laugh looking at redfins transaction details. 2000 sold 155k then got to 2005 sold 550k 2007 listed 800k. Did the clampets find black gold under the house. Is there a gold mine that was discovered? 645k appreciation in 7 years. </p>

<p>Can we find all the people that did this and walked away happy with the money they took. Lets just rewind the last 3-5 years. Anyone who sold and made a profit has to give it back. That way we can take that money and rework the mortgages for the idiots that bought a 700k house on a25k a year in income.</p>
 
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